Click to read the original article for details If you still don't know about HOTMAX, there are only two possibilities: either you're wealthy enough not to need it, or you're out of touch. Although I saw HOTMAX in the Lujiazui CBD business district last year, I didn't realize its popularity. It wasn't until recent shopping trips, when I saw it in two or three consecutive business districts, that I realized it couldn't be underestimated. Out of curiosity, I went in and was shocked! I ended up buying a lot of stuff. In the evening, I chatted with an entrepreneur and told him about HOTMAX. He kept complaining that HOTMAX's low prices hurt brands. I casually searched on Amap and found that Shanghai alone had at least two to three hundred stores. The actual data is far more than that. As of now, HOTMAX has opened more than 500 stores nationwide in three years, with plans to open 5,000 stores in the future. The second brand, Hi-Tego, which started a year later than HOTMAX, already has more than 200 stores. Moreover, both brands are favored by several well-known capital investors and have received multiple rounds of financing. How did it get to where it is today? What is the underlying logic behind its success? With many questions, I studied this brand and found that it understands positioning, cognition, and marketing, making it a valuable case study. Today, I will analyze HOTMAX's development strategy from five dimensions: consumption trends, brand positioning, strategic stages, product structure, and cognitive value. 01 Under the Pandemic Crisis, the 'Value-for-Money Economy' Rises Times create heroes, and times also create brands. HOTMAX's success is not an isolated case but the rise of a group or industry. Besides HOTMAX, many brands, including Hi-Tego, have also experienced rapid development. Behind this is the drive of the times, specifically, changes in people's consumption trends. Since the Sino-US trade war, many people have begun to worry about the future economic situation. The outbreak of COVID-19 at the end of 2019 has lasted for three years. From the initial lockdown of Wuhan to the floods in Zhengzhou, and then to the unprecedented large-scale lockdown of Shanghai this year, not only has the economy been unable to withstand the turmoil, but people's consumer confidence has also suffered a major blow. During the three years of the pandemic, people have become afraid to consume, shifting from wild spending to careful budgeting. People's reluctance to consume does not mean that consumer demand has disappeared; it just means they hope to meet their needs in a more economical and low-cost way. In other words, people like to buy better products at lower prices, that is, products with high cost performance. Under the pandemic crisis, the 'value-for-money economy' has risen. Wei Zhe, former CEO of Alibaba and founder of Jia Yu Capital, once said in a course at Heima Entrepreneurship: In times of crisis, people's purchases of large-ticket household appliances will decline, while purchases of low-priced products that enhance consumer happiness will increase or be less affected by the crisis. What Wei Zhe said here is the same principle: people still have the need for consumption upgrades, but they just don't want to spend that much money. Therefore, high-cost-performance products become more popular during economic crises. For example, UNIQLO, although now a globally renowned clothing brand, rose during Japan's economic downturn. UNIQLO quickly rose in Japan with its high-quality, low-price, high-cost-performance route, and has always been synonymous with cost-effective clothing in China. Under the pandemic crisis, the rise of the 'value-for-money economy' is the macro background for the rise of HOTMAX and Hi-Tego. With a good opportunity of the times, it is also crucial to seize the opportunity; otherwise, you cannot be blessed by fate. In my view, to seize the opportunity of the 'value-for-money economy' rise, you also need the support of correct competitive strategies.

02 HOTMAX's Repositioning: From Clearance Goods to Near-Expiry Products

Repositioning "clearance goods" as "near-expiry products" was a very important step for the HOTMAX channel. You might think, what's so special about that? Isn't "near-expiry products" just the academic expression for clearance goods? In fact, it's far more than that. In reality, near-expiry products have always existed, but in the past, they were in the form of "clearance goods." When you think of clearance goods, what comes to mind? Is it the "clearance sale" of a closed store? Or products hanging alone in a corner of a store? Clearance goods are indeed near-expiry products, but they give the impression of being unsellable or left over from the end of a sale. In short, clearance goods are 'products no one wants left over.' I have seen clearance goods in stores like UNIQLO and Decathlon. They are usually placed in a corner of the clothing section, without spotlights, picked over and messy, giving a very low-end feeling. A few customers come over, pick through them briefly, and quickly leave. Because choosing clearance goods indeed gives people a sense of losing face. But near-expiry products are different. Although near-expiry products are about to expire, they are not products left over because they couldn't be sold. Especially during the pandemic, Shanghai was under static management for three months, and many products on supermarket shelves inexplicably became "near-expiry." Moreover, due to the pandemic, many products may become near-expiry before they even have a chance to reach the mall. As a result, the number of near-expiry products has increased. In fact, near-expiry products are clearance goods. But in customers' perception, near-expiry products are more acceptable, after all, everyone knows why near-expiry products appear: not because they couldn't be sold, but because of pandemic lockdowns, they were delayed until now to be sold. In the past, buying clearance goods gave a low-end feeling; now, buying near-expiry products gives a feeling of getting a bargain. During the pandemic, with economic downturn and insufficient consumer confidence, the HOTMAX channel, through the repositioning of near-expiry products, removed the psychological barrier to consuming clearance goods. Cognition is more important than facts; concepts can indeed influence people's consumption enthusiasm. This is a fact verified in many industries. If you don't believe it, look at the crayfish that everyone loves now. Do you know its original name? Its original name is "mud worm." "Mud worm" is not just a name but also a positioning. Mud worm VS crayfish, doesn't the crayfish in your hand suddenly seem less appetizing? Everyone knows that Xiaomi phones are positioned as cost-effective phones. But Xiaomi never promotes itself as cost-effective. Xiaomi's initial brand slogan was "Xiaomi, born for enthusiasts" and "born for black technology." Black technology VS cost-effectiveness, although the products are the same cost-effective products, "black technology" and "enthusiasts" can better move people to buy. Lockdown is not called lockdown, but 'full-area static management' – doesn't that instantly increase the sophistication and positive energy of the term? The integration of online and offline channels was called O2O in 2015, and by 2016, O2O became commonplace; in 2017, Jack Ma proposed "new retail" to reposition O2O, and it became popular again for three years. Noun concepts can change people's cognition. From the consumer's perspective, "near-expiry products" is a better concept than "clearance goods." It is more valuable, more high-end, and more able to move people to consume. After repositioning "clearance goods" as "near-expiry products," HOTMAX still had two key issues to solve. I have divided the process of solving these two issues into two strategic stages.

03 Two Strategic Stages

First, how to make consumers come to me when buying near-expiry products? Second, simply selling near-expiry products has low profit margins, and the supply is unstable (there may not always be near-expiry products). How can we achieve long-term profitability? Getting consumers to come to me is a traffic generation issue, which must be solved in the early stage, and can be called the first stage. Achieving long-term profitability is a medium-to-long-term issue, which can be called the second stage.

Stage One: Big Brands at Ultra-Low Prices, Establishing Low-Price Cognition

To quickly meet market demand, in the first stage, the HOTMAX channel's primary task was to establish its low-price or "ultra-high cost-performance" cognition through a series of actions. How to establish its ultra-high cost-performance cognition and expand its influence? HOTMAX's answer was: let big brands enter the store and offer ultra-low prices, which proved to be very effective. You can buy Evian mineral water for 1 yuan; a bottle of Genki Forest that usually costs 5 yuan is only 1 yuan here; you can get the "ice cream assassin" Zhong Xue Gao for 7 yuan; and Pocky biscuits are only 2-3 yuan. Why choose big brands? Because only with big brands do people know the price of such brands, your ultra-low price can break through consumers' psychological defenses, form psychological memories, and thus create a huge event impact. Sure enough, the big-brand ultra-low-price strategy successfully entered people's minds. Everyone who has been to HOTMAX will form a cognition: "It's really cheap!" Why? Because "Evian is only 1 yuan." Not only that, such low-priced big brands have also become favorites of major media, becoming the subject of articles by journalists and new media editors. After all, the editors also just came out of HOTMAX, so they might as well give a free promotion. What is good PR? Good PR is not paying someone to write articles; good PR is doing things yourself and letting others spread the word for free. HOTMAX successfully achieved this. Stage Two: Adding Profit Products to Increase Store Profitability Just like Didi, which burned money crazily in the early stage to build brand awareness and successfully acquired stable traffic, it then began to seek profit monetization. The same is true for HOTMAX. Since the first stage established the cognition of low price and ultra-high cost performance through big brands at ultra-low prices, the next step is to think about traffic monetization. After all, once customers enter the store, it's easy to sell them anything. In the past, HOTMAX mainly sold near-expiry products from big brands; now, the proportion of near-expiry products in HOTMAX's sales has changed dramatically. Taking the HOTMAX Wanda CBD store in Chaoyang District, Beijing, as an example, based on estimates of the number of products on shelves, products with a shelf life of less than 3 months account for only about 20%-30%, with beverages and dairy products making up the majority. The rest are mostly regular products with a shelf life of about 1 year, or just 2 months from production. Similarly, a staff member at Hi-Tego in The Place told "Finance World" weekly that the proportion of near-expiry food sold in the store is very small, and products with about half a year of shelf life left are considered "near-expiry food." Another head of a discount supermarket chain store told "Finance World" that the proportion of near-expiry products in the store is only 5% to 7%. From the above, it can be seen that after gaining the cognition of "near-expiry product discount store" and "high cost performance," HOTMAX and Hi-Tego have begun to "hang a sheep's head and sell dog meat" – using the ultra-high cost-performance cognition to attract customers and traffic, and using regular products to monetize traffic and increase profits. Not only that, to better attract customers and monetize profits, HOTMAX has carefully designed its product structure.

04 The Hidden Intentions in HOTMAX's Product Structure

In marketing, a brand's products are generally divided into 4 categories based on their role: momentum products, strategic products, traffic products, and profit products. Momentum products: Products that can enhance brand momentum, generally with higher prices and better image; for example, Feihe's Xingfeifan, Fadner's Queen swimsuit series, Bosideng's Dengfeng down jacket series, and Yanzhiwu's Wan Yan series. Strategic products: Products that are promoted after strategic positioning, generally bringing good traffic or profits, or both; for example, Feihe's Xingfeifan, Fadner's women's swimwear, and Bosideng's trench coat down jacket this year. Traffic products: Products that bring new customers to the brand; for example, Feihe's Xingfeifan, KFC's fried chicken, McDonald's burgers, and Jumper's jackets. Profit products: Products that bring profits to the brand, possibly not the highest sales volume, but with good profit margins, serving as the main source of brand profit. For example, Feihe's Xingfeifan, KFC and McDonald's cola drinks, and Jumper's trousers. You might ask, why are Feihe's momentum products, strategic products, traffic products, and profit products all Xingfeifan? This involves an important marketing knowledge point: in special cases, the product portfolio can be combined into one (momentum, strategic, traffic, and profit products are all the same product). Feihe's Xingfeifan is such a case. Priced at 348 yuan, higher than the average price range of foreign milk powder, it can serve as a momentum product. As a main promotion, it represents the brand's product quality and brand image, making it a strategic product. With high sales volume, it has become a traffic product; and with excellent profit, it is also a profit product. For fast-food brands like McDonald's and KFC, burgers and fried chicken are their strategic and traffic products, while cola and snacks are their profit products. For HOTMAX and Hi-Tego, their product structure is also carefully designed. 1. Traffic Products: Big Brands at Ultra-Low Prices Traffic products are self-evident: they are the brands that quickly help HOTMAX establish brand awareness and attract traffic. For example, the 1-yuan Evian and Genki Forest mentioned earlier. Not only that, to maximize the traffic generation effect, HOTMAX sells these products as limited-quantity items. Yes, although you can buy Evian for 1 yuan, each person is limited to 1 bottle. If the design of traffic products is very clear, the design of profit products is quite elaborate and even astonishing. 2. Profit Products: Second- and Third-Tier Brands, Imported Snacks, Private Labels, and Beauty Products Through field visits and data research, I found that HOTMAX and Hi-Tego's profit products mainly fall into 4 categories: second- and third-tier brands, imported snacks, private labels, and beauty brands. 1) Second- and Third-Tier Brands A reporter from China Business News noted that the products sold in Hi-Tego and HOTMAX stores are not the common products sold in chain supermarkets or convenience stores. Most products here are from second- and third-tier brands, including Hongtaiji, Yangshengji, Liziyuan, Taoweimao, Nuanxiaoniu, Xinnongge, and some unknown brands like Feitaitai, Lingzui Mofang, Jifanxi, Dongling, Kuqi, etc. The prices of these second- and third-tier brand products are not high in the market. For example, the 2.5-yuan pack of Hongtaiji Jiuzhi Huamei (preserved plum) recommended by the Hi-Tego store manager is sold at 28.8 yuan for 10 packs on Hongtaiji's Tmall flagship store, equivalent to 2.88 yuan per pack. In addition, some products are priced higher than online snack stores. For example, a wafer biscuit from Taoweimao is sold at 5.9 yuan in Hi-Tego, while an online snack store sells it for 5 yuan. For second- and third-tier brands, consumers don't know the exact price, so just by manipulating the price tags, combined with the brand awareness formed by big-brand low prices, it's enough to induce consumers to complete the purchase. Second- and third-tier brands are already low-priced, so even if sold at a relatively low price, they can still yield good profits. This is the first type of profit product for HOTMAX and Hi-Tego. 2) Imported Snacks In addition, Hi-Tego and HOTMAX also focus on imported food sales, but these imported foods are not well-known international brands, such as Jinsibo, Xinguan Woyinge, Kela'ao, and many products labeled in foreign languages. To highlight that the products are imported, merchants put the country or region of origin at the top of the price tag, such as Numbudh from Malaysia, a no-rinse antibacterial hand sanitizer. Among these imported products, some brands cannot be found at all. For example, a Wanwan milk beverage, labeled as produced in Taiwan, China, cannot be found on e-commerce platforms. Imported products give people the perception of "high price," but the price cannot be found on e-commerce platforms, which provides HOTMAX with room for price manipulation. In other words, HOTMAX has the pricing power for these unknown imported foods. As long as the gap between the marked price and the retail price on the price tag is large enough, it gives people a feeling of high cost performance. As for the actual value of these imported products, consumers don't know. This is the second type of profit product for HOTMAX and Hi-Tego. 3) Private Labels Frequent customers of HOTMAX are certainly familiar with the name "Xiaqu." According to Tianyancha, Shanghai Xinguo Supply Chain Co., Ltd. applied for trademarks for "Xiaqu" in categories 29 (convenience foods) and 30 (foods) from the end of 2017 to the end of 2021. This company is a wholly-owned subsidiary of HOTMAX. Similarly, Beijing Youpin Kuma Technology Co., Ltd., the company behind Hi-Tego, has registered several trademarks for food, daily chemicals, office supplies, etc., including "Muqi Qiqi," "Qiang Xiaolu," "Yikou Le," "KASUREOO," "Chuben Sheng," and "Xiaoshi Wanxiang." Among them, "Qiang Xiaolu" imitates "Wang Xiaolu." "Wang Xiaolu" is an e-commerce braised snack brand founded in 2016, belonging to Beijing Wang Xiaolu Network Technology Co., Ltd. "Wang Xiaolu" became an internet-famous brand with its spicy chicken feet, topping Tmall's chicken snack category sales for 13 consecutive months from June 2020 to July 2021. In a Hi-Tego store, "Wang Xiaolu" spicy chicken feet are placed at the entrance, near the cash register, on shelves about 1.5 meters high. But when you turn around this shelf, "Wang Xiaolu" transforms into "Qiang Xiaolu," which is 80% similar in appearance to "Wang Xiaolu": the same packaging material and size, the same 200g net weight, and the same cartoon boy with a big head. Even better, the same weight of spicy chicken feet is priced at 23.9 yuan for "Wang Xiaolu" and 18.6 yuan for "Qiang Xiaolu." For such private label products, chain brands directly find OEM factories, eliminating the layers of markup from distributors and traditional supermarket channels, and saving brand promotion fees. They are only slightly cheaper than internet-famous products, appearing to give up profits, but the profit margins are actually considerable. Private labels are the third type of profit product for HOTMAX and Hi-Tego. 4) Beauty Products Finally, beauty products are also one of the profit product types for HOTMAX and Hi-Tego. Imagine this scenario: you originally wanted to buy some near-expiry snacks, but when you leave, you inexplicably end up with a few bags of Fuerjia masks. The low-price cognition is magical, making you feel that everything in the store is low-priced. Even if all are low-priced, beauty products have much higher profit margins than snacks, and they may not even be truly low-priced. A bottle of drink sells for 3 yuan, while a beauty product sells for dozens of yuan. Even if the gross margins are at the same level, near-expiry products don't make as much as beauty products. "For beauty products in discount stores, consumers see the price as very low because it's compared to the retail price, but for the supply chain, such prices still have high profit margins." Indeed, if you study the cost and profit margins of beauty brands, you'll understand why beauty is so profitable. Take Estée Lauder and L'Oréal, for example, whose gross profit margins are consistently above 70%. Beauty products are the fourth type of profit product for HOTMAX. With the product portfolio of traffic and profit products in place, the more important thing is to sculpt customers' cognitive value, and HOTMAX is the king of sculpting cognitive value.

05 How Does HOTMAX Manage the Cognitive Value of Products?

How does HOTMAX sculpt customers' cognitive value? Before solving this problem, let's first look at what cognitive value is.

1. What is Cognitive Value?

In contrast to factual value, cognitive value is the value of something in the customer's cognition. For example, a Coca-Cola usually sells for 3 yuan, but at McDonald's, you feel it's worth 6 yuan. 3 yuan is the factual value, and 6 yuan is your cognitive value of that Coke. Factual value is relatively stable, while cognitive value changes due to factors such as the product's environment and external packaging. However, cognitive value determines whether customers will buy. People do not live in the real world but in the world of their own cognition. In short, if it's cheap in fact, customers may not buy; if it feels cheap in their cognition, they will buy. Therefore, cognitive value is greater than factual value. 2. Cognitive Value is Greater Than Factual Value Positioning theory emphasizes that cognition is greater than fact. Similarly, whether it's cheap or not doesn't matter; what matters is making it feel cheap in your cognition. How much the thing you buy is worth doesn't matter; what matters is making you think it's worth a certain amount. For example, HOTMAX's positioning is not so much low price as high cost performance, because no matter how cheap a cheap product is, people won't buy more of it. Only when something originally expensive suddenly becomes cheap today does the desire to consume appear. Here, the desire to consume is actually the desire to get a bargain. In other words, consumers don't want cheapness; they want to get a bargain. More precisely, consumers want the feeling of getting a bargain. How should HOTMAX give consumers the feeling of getting a bargain? Before solving this problem, let's first look at what getting a bargain means.

3. Cost-Performance Coefficient = Cognitive Value / Sales Price

Getting a bargain means buying a product with higher cost performance. What is cost performance? The following formula can tell you. In this formula, the higher the cost-performance coefficient, the higher the product's cost performance, and the more it gives people a feeling of getting a bargain; conversely, the lower the coefficient, the lower the cost performance, and the less customers get a bargain. For example, this cup of Coke is actually worth only 3 yuan (factual value). Before any promotion, factual value equals cognitive value. If the sales price is 3 yuan, the cost-performance coefficient is 1. But after a round of promotion, the cognitive value of this product becomes 9 yuan. If your sales price remains 3 yuan, the cost-performance coefficient becomes 3. Scary: the product is still the same product, but the cognitive value has tripled, and the cost-performance coefficient has also tripled. This is managing customer cognition. Customers may not actually get a bargain, but they really have the feeling of getting a bargain. HOTMAX and Hi-Tego are masters of managing customer cognition. 4. How Does HOTMAX Manage Customer Cognition? How does HOTMAX manage customer cognition? Let's return to the cost-performance coefficient formula above. From this formula, we can see that for HOTMAX to improve the cost-performance coefficient of its products, there are only two ways: one is to increase the cognitive value of the product, and the other is to lower the sales price. In the first stage of HOTMAX, most products were near-expiry products from big brands, with high factual value (and high cognitive value), and the sales price could indeed be very low, resulting in a high cost-performance coefficient. For example, the 1-yuan Evian mineral water has a very high cost-performance coefficient. In customers' cognition, Evian water is priced at 7 yuan. 7 divided by 1 gives a cost-performance coefficient of 7. With such high cost performance, it's no wonder Evian is so eye-catching. From this, it can be seen that HOTMAX's traffic products must have a very high cost-performance coefficient; otherwise, they cannot serve the purpose of attracting traffic. In the second stage of HOTMAX, it can no longer rely solely on lowering sales prices to improve the cost-performance coefficient; instead, it should rely more on increasing the cognitive value of products, and it must ensure that cognitive value > factual value, so that HOTMAX can make a profit. We used to think that the value of a product is fixed and that people can clearly know the price range of a product. In fact, this is not the case. People's judgment of product value is easily influenced by the external environment. How much is a bowl of Lanzhou beef noodles worth? In a street-side shop in Shanghai, this bowl of noodles is worth 12 yuan; at Chen Xiang Gui in a shopping mall, this bowl of noodles is worth 26 yuan. What changes is not the noodles, but the environment, and the environment changes people's cognitive value of the noodles. In fact, not only the consumption environment, but also store location, store decoration, near-expiry products, discount positioning, retail price tags, product packaging, etc., can all change people's perception of product value. HOTMAX has used these to the extreme. Store location: Compared to traditional mom-and-pop stores and wholesale markets that sell clearance goods, HOTMAX stores are located in high-traffic, upscale shopping malls, making people feel that the product quality is more reliable and the price is higher. Store decoration: Mom-and-pop stores and wholesale markets have no decoration to speak of, but HOTMAX's decoration can be said to reach the level of UNIQLO – not luxurious, but simple and elegant. Secondly, the hanging banners and posters with slogans like "1% off everything," "Amazing Sale," and "Low prices all year round" create a full sale atmosphere, making you feel that buying is earning before you even buy. Near-expiry products: Compared to clearance goods being sold off, the concept of near-expiry products has higher momentum and value. Discount positioning: The 1-yuan Evian makes consumers feel that this is a place specializing in high-cost-performance products, and they can come here to buy in the future. Retail price tags: On HOTMAX's retail price tags, there is usually a high manufacturer's suggested retail price (to increase cognitive value), followed by a vastly different actual retail price (to lower the sales price). The contrast gives people a feeling of high cost performance (increasing the cost-performance coefficient). Shelf display: The shelf display and product packaging presentation give a sense of quality, making people feel that these are not generic brands but quality goods (in reality, they are second- and third-tier or unknown brands). It is through the above six actions of managing customer cognition that HOTMAX has shaped the mental cognition of big brands at ultra-low prices, increased the cognitive value of the products it sells, and given people a feeling of getting a bargain. 06 Summary In April 2020, HOTMAX founder Gu Xiaojian laid off employees until only 12 remained, and Fan Zhifeng, founder of Fanrong Jishi, laid off until only 6 remained. The two originally planned to sell off their remaining clearance goods and then disband, but unexpectedly, sales exploded that day. The previous day's revenue was only 1,500 yuan, but surprisingly, that day's revenue reached 80,000 yuan. From then on, it was unstoppable. Now HOTMAX has become the absolute leading player in the near-expiry product discount track, with 500 offline stores and plans to open 5,000 in the next three years. As the saying goes: HOTMAX, so easy to sell, meets the good times of the pandemic Others face crisis and lay off, but I open stores as if in a race Clearance goods repositioned as near-expiry, cognitive value raised One-yuan Evian water, seizing ultra-low-price cognition Product structure stable, traffic and profit clearly divided Traffic products attract traffic, profit products earn profits Six actions all used, customers feel they get a bargain In the end, it comes back to cost performance, managing cognition to win first place References: 1. AI Finance and Economics, "HOTMAX and others started with near-expiry products, got financing easily and opened stores crazily, now want to tear off the label" 2. People's Information, "Reporter visits HOTMAX and Hi-Tego: There's a lot behind the 1% off sale" Source: Positioning Consulting Circle (ID: idingwei) Author: Positioning Ascetic -END-